The Federal Reserve left interest rates unchanged on January 29, and an interest rate cut is unlikely when the Fed issues its next policy decision on March 19. Elevated levels of consumer inflation combined with a solid labor market imply that the Fed does not need to urgently cut interest rates. However, the pace and timing of Fed rate cuts beyond March are less clear. Based on the December 2024 Federal Open Market Committee forecasts, two interest rate cuts are likely in 2025. Additionally, if inflationary pressures ease significantly in the months ahead, the Fed could entertain more rate cuts than the December FOMC projections suggest.
The Fed Left Interest Rates Unchanged In January
The U.S. Federal Reserve left the federal funds rate unchanged in a range between 4.25% and 4.50% on January 29, which was widely expected. In fact, the CME FedWatch Tool reflected the likelihood that the Fed would leave interest rates unchanged at 99.5% immediately ahead of the decision. The odds of a rate cut were effectively zero at only 0.5%.
The January FOMC interest rate decision was informed by the Fed’s dual mandate to foster full employment and keep prices low and stable.
The FOMC noted in the January statement that, “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.”
These remarks are supported by recent U.S. labor market and consumer inflation data.
With a low unemployment rate of only 4.1% in December and almost 8.1 million open jobs in November, the U.S. labor market is close to full employment, and it is certainly “solid.”
Additionally, while year-on-year inflation rates have slowed, inflation remains “somewhat elevated,” with December 2024 year-on-year total CPI up 2.9% and core CPI up 3.2%. In November, total PCE inflation was up 2.4%, and core PCE inflation was up 2.8%. All of these inflation rates are well above the Fed’s 2% target.
With risks roughly in balance, the Fed had significant justification to leave interest rates on hold in its January policy decision. At future FOMC meetings this year, inflation is likely to be the most important factor determining whether the Fed has the license to cut rates or not.
Fed Chair Gives Cautious Press Conference Remarks
With no change in Fed policy, a great deal of attention was paid to Fed Chair Jerome Powell’s comments in the press conference that followed the FOMC decision.
However, market observers hoping for major revelations from Powell’s press conference were likely disappointed by his remarks that began at 2:30 p.m. ET on January 29.
Powell struck a cautious tone in his remarks, reiterating that the Fed’s future policy decisions will be informed by incoming economic data, especially about inflation and the labor force.
There were also many questions about potential policy actions from the Trump administration due to the potential risks to inflation. In truth, significant risks to inflation and Fed policy are posed by possible tariff and immigration policies that could be implemented by the administration. However, the paths of trade and immigration policies are not yet clear, and they may not be for some time.
Moreover, since the Fed strives to remain politically neutral, both of these topics were off the table for Powell to comment on.
Looking Ahead To The Future Of Fed Policy
The Fed is likely to leave interest rates on hold for at least one more meeting. That means the Fed is unlikely to cut rates on March 19. However, if significant progress is made on inflation, the Fed could consider rate cuts on either May 7 or June 18.
According to the CME FedWatch Tool, the odds of a Fed rate cut by 0.25% at the March 19 meeting were 22.3% as of 3:10 p.m. ET. Meanwhile, the chance of no rate change was 77.6%. Although almost zero, the potential for a 0.50% rate cut was 0.1%.
Inflation seems likely to be the lynchpin that will determine whether the Fed will have the license to cut rates in future policy decisions this year. Prestige Economics expects year-on-year Total CPI and Total PCE to decelerate in Q2 2025 due to base effects. However, Core CPI and Core PCE measures of inflation are likely to remain elevated and above the Fed’s 2% target through most, if not all, of 2025.
Future Fed interest rate cuts are likely in 2025. Still, it will likely be a number of months, and the direction and pace of Fed policy will be highly dependent on the future incoming economic data for inflation and the labor market.
If year-on-year inflationary pressures ease significantly in Q2 2025, the Fed could entertain a 0.25% rate cut in May or June 2025. According to the CME FedWatch Tool, the odds of a Fed rate cut by 0.25% at the May 7 meeting were 38.0% as of 3:10 p.m. Meanwhile, the chance of no rate change was 55.5%, and the potential for a 0.50% rate cut was 6.4%.
Market Implications Of Future Fed Policy
Financial market moves hinge closely on Fed policy. Interest rate changes impact foreign exchange rates, bond markets, equities, private company business valuations, and industrial commodity prices.
If the Fed should cut interest rates sooner than markets are expecting, the dollar would likely fall while bond, equity, and industrial commodity prices get a boost. However, if the Fed should hold off on interest rates for some time – or for all of 2025 – the greenback could strengthen against most major currencies, while equity, bond, and industrial commodity prices likely come under pressure.
What do you think of the January 2025 Fed decision and the prospects for Fed interest rate cuts in 2025 and beyond?
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